Introduction

The report is about the investment analysis of Singapore Telecommunications Limited.

This will include the concepts of free cash flow to the firm, free cash flow to equity, Price
to earnings model, price to book model and then the evaluation based on the
computations. Before proceeding further, it is quite necessary to understand the concepts.
Free cash flow basically measures as to what amount of cash the business would generate
after the fulfillment of capital expenditures like equipment and buildings. Such cash can
then be utilized for the purpose of divdends, expansion, debt reduction and etc. Free cash
flow to equity is a measure of how the distribution of cash can be made to the
stockholders of the company as stock buybacks or dividends when all of the
reinvestments, expenses, and repayments of debt are made. Free cash flow is basically an
important concept since it will allow the company to have several opportunities in order
to enhance shareholder value. Therefore, free cash flow gives a crystal clear view of the
ability to generate cash and therefore, the profits. However, for this company, Singtel, the
free cash flow to equity is negative but it should be considered a bad figure in itself. It
would primarily mean on the other hand, that the company is having a strategic plan to
make large investments. When such investments earn a high return, then such a strategic
plan can have the potentiability to pay off within the long run. It can be said that free cash
flow is a better method than the price to earnings ratio. The computations with the
forecasts are illustrated below:

Free Cash Flow for SingTel

Before forecasting the free cash flow for the next 5 years, it is necessary to have a quick
look at the previous 5 years for the FCF of Sing Tel. This is illustrated below:

SINGAPORE
TELECOMMUNICATIONS
LIMITED CASH FLOW (SGD
million)
Fiscal year ends in March. SGD in
millions except per share data.
Cash
Flows
From
Operating
Activities

2011

2012

2013

2014

2015

Depreciation & amortization

1969

2002

2127

2133

2161

Inventory

32

92

-7

27

-107

Other working capital

-16

-80

-85

-332

193

Other non-cash items

Net cash provided by operating
activities

4059

3698

3782

3523

3539

6043

5710

5818

5350

5787

Operating cash flow

Capital expenditure ( As per the
annual reports for first 5 Years)

6043

5710

5818

5350

5787

2005

2249

2059

2102

2238

Free cash flow

4038

3461

3759

3248

3549

EPS - Earnings per share

24.02

25.04

22.02

22.92

23.73

Capital Expenditure

2005

2249

2059

2102

2238

Depreciation
Debt Ratio

1860
0.380683
26

1880
0.420357
27

1970
0.400635
25

1960
0.392980
67

1960
0.4120569
57

Working capital ( 2010 = -1691)

-1986

283

-986

-1339

-989

Change in Working capital

-295

-1269

FCFE

1295.744

-1703
24.80927
5

622.2971

-353
876.0756
3

Growth rate(Unusual)

1.914674
18

140.7809
27

82.32095
66

350
721.19383
58
51.442480
73

Free Cash Flow

2508.324
41

In accordance with the above table, the free cash flow is positive but the free cash flow to
equity is negative. Due to this particular trend, the following forecasts can be made:

SINGAPORE TELECOMMUNICATIONS
LIMITED CASH FLOW (SGD million)
Fiscal year ends in March. SGD in millions
except per share data.

2016

2017

2018

2019

2020

Cash Flows From Operating Activities

Depreciation & amortization

2290.66

Inventory

-113.42

Other working capital

204.58

Other non-cash items

3751.34

Net cash provided by operating activities

6134.22

Free Cash Flow

Operating cash flow

Capital expenditure ( As per the annual
reports for first 5 Years)

6134.22

Free cash flow

3761.94

2372.28

0
EPS - Earnings per share

25.1538

Capital Expenditure

2372.28

Depreciation
Debt Ratio

2077.6
0.436780
37

Working capital ( 2010 = -1691)

-1048.34

Change in Working capital

371
764.4654
7

FCFE
Growth rate(Unusual)

-54.52903

2428.09
96
120.225
2
216.854
8
3976.42
04
6502.27
32

2573.785
58
127.4387
1
229.8660
88
4215.005
62
6892.409
59

2728.212
71
135.0850
3
243.6580
53
4467.905
96
7305.954
17

2891.9054
73
143.19013
68
258.27753
65
4735.9803
19
7744.3114
18

0
6502.27
32
2514.61
68
3987.65
64

0
6892.409
59
2665.493
81
4226.915
78

0
7305.954
17
2825.423
44
4480.530
73

0
7744.3114
18
2994.9488
43
4749.3625
75

0
26.6630
28
2514.61
68
2202.25
6
0.46298
72
1111.24
04

0
28.26280
97
2665.493
81
2334.391
36
0.490766
43
1177.914
8

393.26
810.333
39
57.8007
71

416.8556

0
29.95857
83
2825.423
44
2474.454
84
0.520212
41
1248.589
7
441.8669
36

-858.9534
61.26881
8

-910.4906
64.94494
7

0
31.756092
96
2994.9488
43
2622.9221
32
0.5514251
59
1323.5050
96
468.37895
22
965.12003
75
68.841643
49

The above forecasts also entail that the free cash flow is postitive for the company which
indicates that the companys financial health is stable. However, they have surplus cash to
pay off the dividends or buy back shares but as mentioned earlier, they are planning to

expand further since this is a leading company for telecommunications in Asia and has to
make big investments in order to the customers first priority. The debt ratio for the
company keeps on increasing which indicates that the company is depending much on the
debt investments. Hence, the company should depend on the equity funds and gain
investors confidence so as to reduce the debt burden. The FCFE is negative and the
reason has already been mentioned.

Price Earnings Model

The price to earnings model basically values the company in order to measure the
existing share price that is quite relative to the per share earnings. Investors mainly use
this model to measure the attractive for the current value of the asset and most
significantly, the current level of the price that would prove to be a great opportunity for
them. High P/E values would suggest that the investors need to pay a much greater
amount for the earnings of the company. Therefore, it would indicate that the asset is
highly expensive and hence, it would be a better concept to wait for later entry. The EPS
for Singtel is mainly high-moderate. This is the forecasts for the next five years as
illustrated below. If we coduct the sensitivity analysis, then still the P/E remain high.
Moreover, through this model, the intrinsic value and projected stock value has also been
calculated which is as below:
SingTel
Expected Market
Price
Expected EPS
Forward P/E

2016

2017
2018
2019
2020
3.8616 3.9775 4.0968 4.2197
3.7492
76
26
52
58
0.2472
0.25
0.3
0.27
0.278
15.166
13.258 15.166 15.107
67
15.2
42
67
91

In order to calculate the intrinsic value, it is necessary to follow the computations below:

EPS in 10 years = 0.24*(1+0.03) ^10

EPS in 10 years = 0.322539931
Projected share value = 0.322 * 10 = 3.225
Intrinsic value at 15% growth rate (assumption) = 3.225/(1+0.15)^10 = 0.79 SGD

In accordance with existing growth rate for the share price, it is assumed at 1.03 and the
EPS is assumed to grow at the same existing rate.

Price Book Model

The price to book ratio mainly makes a reflection of the fact as to how many times book
value shareholders are willing to pay for the share. The forecasts are as below with the
certain assumptions:
1. Book value is assumed to be constant
SingTel
Stock Price
Book Value
Price to Book

2016
2017
2018
2019
2020
3.749 3.8616 3.9775 4.0968 4.2197
2
76
26
52
58
1.290 1.2907 1.2907 1.2907 1.2907
78
8
8
8
8
2.904 2.9917 3.0814 3.1739 3.2691
6
38
9
35
53

Price-Book value is relatively acceptable. However, lower price to book ratios mean that
the stock is undervalued. The price to book ratios are not that much low for this company
and neither too high. Therefore, the stock has a moderateness between an overvalued and
undervalued stock.

Sensitivity Analysis
The Sensitivity analysis is conducted so that more forecasts can be made if the values are
made different. For the price to earnings, the sensitivity analysis is as below:
Scenario Summary
Current Values:

Intrinsic Value

Changing Cells:
$K$15
3.22539931
3.33
Result Cells:
$K$18
0.797269381
0.823125071
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.

If the projected share value is made to be 3.33, then the intrinsic value at the assumed
growth rate is 0.823. Another sensitivity is also done as illustrated below:
Scenario Summary
Current Values:

Intrinsic Value 2

Changing Cells:
$K$15
3.22539931
3.44
Result Cells:
$K$18
0.797269381
0.850315389
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in gray.

If the projected share value is made to be 3.44, then the intrinsic value gets to be 0.85.

The sensitivity analysis for Price-Book model is illustrated below. In this two
components will be tested. They are as below:

1. For Stock Price

Scenario Summary
Current Values:

Intrinsic
Value 2

P/B

Changing
Cells:
$K$15
$F$8
Result
Cells:

3.22539931
4.21975763

3.44
4.2197576
3

3.2253993
1
4.25

3.2691528 3.2925824
$F$10
3.26915289
9
18
Notes: Current Values column represents values of changing
cells at
time Scenario Summary Report was created. Changing cells for
each
scenario are highlighted in
gray.

If the stock price changes to 4.25, then the price to book value also increases from 3.26 to
3.29 and when the book value changes, the result is as below:
Scenario Summary
Current Values:

Intrinsic
Value 2

P/B

P/B 2

3.2253993
1

3.2253993
1
4.2197576
3

Changing
Cells:
$K$15

3.22539931

$F$8

4.21975763

$F$9
Result
Cells:

1.290780142

3.44
4.2197576
3
1.2907801
42

4.25
1.2907801
42

1.55

3.2691528 3.2925824 2.7224242

$F$10
3.26915289
9
18
78
Notes: Current Values column represents values of changing cells at
time Scenario Summary Report was created. Changing cells for each
scenario are highlighted in
gray.

The price to book value changes to 2.72 from 3.29 which indicates that with the increase
in the book value, the price to book value decreases and hence, there is an inverse
relationship between the two.

Conclusion
In accordance with the above findings, it can be said the investment in this company can
be a better opportunity for the shareholders, though they will have bear with less or even
no dividends in the beginning because the company plans to make larger investments for
future prospects and opportunities. That is why, FCFE is negative and the investors and
shareholders need not to have any concern regarding this.